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Brazilian GDP growth confirms weak activity in 2018

March 1, 2019

Looking ahead, we expect GDP to grow 2.0% in 2019 and 2.7% in 2020, assuming progress in reforms

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GDP expanded 0.1% qoq/sa in 4Q18, in line with expectations, and 1.1% yoy, below the market expectations but close to our forecasts. The reading reinforces the perception of weak growth in late 2018. GDP growth in 2018 was the same as in 2017. The recovery that began in 2017 remains timid when considering the GDP decreases in 2015 (-3.5%) and 2016 (-3.3%).

Looking ahead, we expect GDP to grow 2.0% in 2019 and 2.7% in 2020, assuming progress in reforms. Importantly, the earliest indicators for 1Q19 add downside to our call.
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Still on activity indicators, CAGED registered a net creation of 34.3k jobs in January, well below our call (+100k) and the market’s (+86k). Seasonally-adjusted, 25.6k formal jobs were created in January, taking the 3-month moving average to 50k (from 58k in the previous month). The sectorial breakdown shows gains in the services, retail and manufacturing sector, while the civil construction declined in January. Similar to PNAD’s unemployment figure for January, the CAGED report reinforces the outlook of weak activity growth in early 2019.

On fiscal accounts, the consolidated public sector posted a primary surplus of BRL 46.9 billion in January, slightly below our call (48.8 billion) but higher than market consensus (41.1 billion). The central government had a surplus of BRL 30.2 billion, missing a bit our 31.8 billion estimate, while regional governments and state-owned companies posted surpluses of BRL 10.8 billion and BRL 0.5 billion, respectively, that came in line with expectations. The consolidated primary deficit over 12 months remained at 1.6% of GDP, the same as in December. The January report stresses that meeting the annual primary deficit target for the public sector of BRL132 billion requires discipline, but shouldn’t be challenging.

The general government’s gross debt was stable vs. December, at 76.7% of GDP in January, while the public sector’s net debt increased to 54.0% of GDP from 53.8%. The nominal deficit narrowed to 6.8% of GDP from 6.9%, reflecting lower interest expenses. A favorable fiscal scenario depends strictly on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt.

Day Ahead: February’s trade balance will be released at 3:00 PM, for which we forecast a USD 4.1 billion surplus.


The monetary policy committee decided to tighten the monetary policy stance given the still-high level of inflation.

The new monthly targets for monetary base during the period March-May are zero growth relative to the actual average February level (instead of the original target for that month). We note the actual February monetary base level was 3% below the target for the month.

In addition, the central bank reduced the maximum expansion of the monetary base due to exchange-rate interventions. The new limit is 2% of the February monetary base (previously 3%) subject to maximum daily interventions of USD 50 million (previously USD 75 million). We note that purchases of dollars may happen if the exchange rate falls below the lower bound of the non-intervention zone. Asymmetrically, the maximum daily sales of dollars, if the peso weakens above the upper bound, remains at USD 150 million. These interventions are not sterilized and will adjust automatically (upward or downward) the monetary base targets if they occur.

In our view, the decisions go in the right direction given the deterioration of the inflation outlook and the proximity of the wage bargaining season.

Day Ahead: February’s tax collection
will see the light. We expect an increase of 40% yoy to ARS 330 billion.


The labor market continued to show a mixed performance at the beginning of 2019. The unemployment rate for the quarter ending in January came in at 6.8%, in line with expectations, but was 0.3pp higher than one year earlier. Meanwhile, job creation moderated to 0.6% yoy, from 0.7% in 4Q18, the lowest since the quarter ended in November. Complementary sources of information (capturing formal employment) that the central bank monitors show mixed results. Given labor market dynamism generally lags the economic recovery, last year’s activity pick-up, along with expectations that recovery consolidates throughout this year, some improvement of labor market dynamics ahead is likely.

We see some tightening of the labor market (unemployment to 6.7%, below last year’s 7%) this year as it benefits from the lengthy activity recovery. We note that the Institute of Statistics is in the process of revising labor statistics, gradually updating samples on the back of information collected in the 2017 Population Census and crosschecking with complementary data sources (some pointing at higher employment growth).
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Manufacturing started 2019 on a better than expected footing. Yet, industrial production (aggregating mining, manufacturing and utilities) decreased 0.8% yoy in the first month of this year (+1.6% in December), dragged down by mining. Manufacturing grew 2.7% in January, far above our 0.3% forecast (also the market median expectation), as growth in December was sharply revised from 0.8% to 2.7%. Going forward, growth may be adversely affected by harsh weather in February, which resulted in mining operations interruptions, consolidating the view of a weaker 1Q19 (relative to the end of last year).

Recovering sentiment and improving copper prices point to favorable activity dynamics in the short term. Robust imports of capital goods, upbeat manufacturing of machinery and equipment as well as positive credit results favor an investment-led consolidation of the recovery. However, uncertainty regarding inflation dynamics and still elevated external risks support a more cautious central bank, the likelihood of further rate hikes during the remainder of the first semester is low.
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Economic activity grew 2.7% last year, above our 2.6% expectation, but after a downwardly revised 1.4% growth for 2017 (from 1.8%). In the final quarter of 2018, activity rose 2.8% (in line with our expectations; 2.9% market consensus; 2.7% in 3Q18), led by robust consumption and recovering investment, while soaring imports led to a growing net exports drag. Overall, the gradual activity recovery continues to unfold but growth likely remains below potential, so the negative output gap continues to widen. Hence, with inflation near the central bank’s 3% target and the external scenario still uncertain, the policy rate is likely to remain stable at a mildly expansionary level for the time being.

We expect activity to consolidate its recovery this year. Growth of around 3.3% would come amid an expansionary monetary policy. Risks to our scenario include a weak labor market, less favorable oil prices (relative to 2018), external financial conditions (given Colombia’s wide current account deficit) and a challenging fiscal outlook.

The coincident activity indicator (ISE) in December came in below market expectations and moderated at the margin. The original series slowed to 1.9% yoy from the 3.5% recorded in November, and was closer to our 2.3% expectation than to the market consensus. Growth in 4Q18 was 2.8% yoy (broadly stable from the previous two quarters) and showed a similar sectoral composition to GDP data published on the same day. Once corrected for calendar and seasonal factors, activity shrunk a mild 0.1% mom (+0.6% in November 2018). At the margin, activity moderated to 2.6% qoq/saar (+3.1% in 3Q18), also in line with national accounts data, showing activity entered 2019 with a weak momentum.

The January national unemployment rate of 12.8% was above the 11.8% recorded one year earlier, explained by higher urban unemployment. The urban unemployment rate increased to 13.7% from 13.4% (one year earlier), in line with the market consensus (13.7%) and our 13.6% expectation. Yet, the seasonally adjusted labor market series showed urban unemployment falling 0.6 percentage points from December to 10.7%, while further loosening in rural areas (to 10.1% from 9.3%) led to total unemployment picking up to 10.4% (10.2% in December).

In all, the labor market of Colombia remains weak, despite some growth improvement, which is consistent with the central bank’s (and our) view that growth remains below potential. Thus, the numbers reinforce our view that interest rate hikes are still far.


Day Ahead: Banxico will release its expectations survey for February at 12:00 PM.


Day Ahead: At 3:00 PM, the statistics institute (INEI) will announce February’s CPI, which we forecast at 0.24% mom, leading the annual headline inflation to 2.12% yoy in the month.

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